Principles of Corporate Finance 14th INTERNATIONAL Edition by Richard Brealey, ISBN-13: 978-1265074159

Description

Principles of Corporate Finance 14th INTERNATIONAL Edition by Richard Brealey, ISBN-13: 978-1265074159

[PDF eBook eTextbook]

• Publisher: ‎ McGraw-Hill Higher Education; 14th edition (July 19, 2022)
• Language: ‎ English
• 1057 pages
• ISBN-10: ‎ 1265074151
• ISBN-13: ‎ 978-1265074159

The latest edition in the Principles of Corporate Finance dynasty, the 14th edition continues in its tradition of showing how theory applies to the very practical problems and decisions faced by financial managers. Looking at what financial managers do and why, the book aims to give readers a solid understanding of theory so that they know what questions to ask when times change and new problems need to be analyzed, eventually standing as a reference and a guide to help them make financial decisions, not just study them. This new edition welcomes Alex Edmans to the author team, whose global authority and expertise in corporate governance, responsible business and behavioural finance have been invaluable in bolstering coverage of these topics. A new chapter is entirely dedicated to the subject of balancing shareholder value with promoting the interests of all stakeholders, the potential conflicts inherent in this, and how a responsible business should behave. There have been several changes to chapter structure as well as expanded discussion of issues that have grown in importance since the previous edition including behavioural finance, and financial innovation driven by AI, big data and cloud computing. It has also grown to take a more international focus, to bring in more information and perspectives on major developing economies such as China and India, and looking at how financing and governance systems differ around the world. The new edition retains and builds on the pedagogical features of previous editions, with new chapter content summaries, new self-test questions interspersed at key points, and a raft of ‘Beyond the page’ examples available online through links in the text.

Table of Contents:

Cover

Half Title

Title

Copyright

Dedication

About the Authors

Preface

Guided Tour

Supplements

Connect

Brief Contents

Contents

Part One: Value

1 Introduction to Corporate Finance

1-1 Corporate Investment and Financing Decisions

Investment Decisions

Financing Decisions

What Is a Corporation?

The Role of the Financial Manager

1-2 The Financial Goal of the Corporation

Shareholders Want Managers to Maximize Market Value

A Fundamental Result: Why Maximizing Shareholder Wealth Makes Sense

Should Managers Maximize Shareholder Wealth?

The Investment Trade-Off

Agency Problems and Corporate Governance

1-3 Key Questions in Corporate Finance

Key Takeaways

Problem Sets

Solutions to Self-Test Questions

Appendix: Why Maximizing Shareholder Value Makes Sense

2 How to Calculate Present Values

2-1 How to Calculate Future and Present Values

Calculating Future Values

Calculating Present Values

Valuing an Investment Opportunity

Net Present Value

Risk and Present Value

Present Values and Rates of Return

Calculating Present Values When There Are Multiple Cash Flows

The Opportunity Cost of Capital

2-2 How to Value Perpetuities and Annuities

How to Value Perpetuities

How to Value Annuities

Valuing Annuities Due

Calculating Annual Payments

Future Value of an Annuity

2-3 How to Value Growing Perpetuities and Annuities

Growing Perpetuities

Growing Annuities

2-4 How Interest Is Paid and Quoted

Continuous Compounding

Key Takeaways

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

3 Valuing Bonds

3-1 Using the Present Value Formula to Value Bonds

A Short Trip to Paris to Value a Government Bond

Back to the United States: Semiannual Coupons and Bond Prices

3-2 How Bond Prices Vary with Yields

Duration and Interest-Rate Sensitivity

3-3 The Term Structure of Interest Rates

Spot Rates, Bond Prices, and the Law of One Price

Measuring the Term Structure

Why the Discount Factor Declines as Futurity Increases

3-4 Explaining the Term Structure

Expectations Theory of the Term Structure

Interest Rate Risk

Inflation Risk

3-5 Real and Nominal Interest Rates

Indexed Bonds and the Real Rate of Interest

What Determines the Real Rate of Interest?

Inflation and Nominal Interest Rates

3-6 The Risk of Default

Corporate Bonds and Default Risk

Sovereign Bonds and Default Risk

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

4 Valuing Stocks

4-1 How Stocks Are Traded

Trading Results for Cummins

Market Price vs. Book Value

4-2 Valuation by Comparables

4-3 Dividends and Stock Prices

Dividends and Capital Gains

Two Versions of the Dividend Discount Model

4-4 Dividend Discount Model Applications

Using the Constant-Growth DCF Model to Set Water, Gas, and Electricity Prices

DCF Models with Two or More Stages of Growth

4-5 Income Stocks and Growth Stocks

Calculating the Present Value of Growth Opportunities for Establishment Electronics

4-6 Valuation Based on Free Cash Flow

Valuing the Concatenator Business

Valuation Format

Estimating Horizon Value

Key Takeaways

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

Mini-Case: Reeby Sports

5 Net Present Value and Other Investment Criteria

5-1 A Review of the Net Present Value Rule

Net Present Value’s Competitors

Five Points to Remember about NPV

5-2 The Payback and Accounting Rate of Return Rules

The Payback Rule

Accounting Rate of Return

5-3 The Internal Rate of Return Rule

Calculating the IRR

The IRR Rule

Pitfall 1—Lending or Borrowing?

Pitfall 2—Multiple Rates of Return

Pitfall 3—Mutually Exclusive Projects

Pitfall 4—What Happens When There Is More Than One Opportunity Cost of Capital

The Verdict on IRR

5-4 Choosing Capital Investments When Resources Are Limited

How Important Is Capital Rationing in Practice?

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Mini-Case: Vegetron’s CFO Calls Again

6 Making Investment Decisions with the Net Present Value Rule

6-1 Forecasting a Project’s Cash Flows

Rule 1: Discount Cash Flows, Not Profits

Rule 2: Discount Incremental Cash Flows and Ignore Non-Incremental Cash Flows

Rule 3: Treat Inflation Consistently

Rule 4: Separate Investment and Financing Decisions

Rule 5: Forecast Cash Flows after Taxes

6-2 Corporate Income Taxes

Depreciation Deductions

Tax on Salvage Value

Tax Loss Carry-Forwards

6-3 A Worked Example of a Project Analysis

The Three Components of Project Cash Flows

Cash Flow from Capital Investment

Operating Cash Flow

Investment in Working Capital

How to Construct a Set of Cash Flow Forecasts: An Example

Capital Investment

Operating Cash Flow

Investment in Working Capital

Accelerated Depreciation and First-Year Expensing

Project Analysis

6-4 How to Choose between Competing Projects

Problem 1: The Investment Timing Decision

Problem 2: The Choice between Long- and Short-Lived Equipment

Problem 3: When to Replace an Old Machine

Problem 4: Cost of Excess Capacity

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Mini-Case: New Economy Transport (A)

New Economy Transport (B)

Part Two: Risk

7 Introduction to Risk, Diversification, and Portfolio Selection

7-1 The Relationship between Risk and Return

Over a Century of Capital Market History

Using Historical Evidence to Evaluate Today’s Cost of Capital

7-2 How to Measure Risk

Variance and Standard Deviation

Calculating Risk

Estimating Future Risk

7-3 How Diversification Reduces Risk

Specific and Systematic Risk

Diversification with Many Stocks

7-4 Systematic Risk Is Market Risk

Portfolio Choice with Borrowing and Lending

Market Risk

7-5 Should Companies Diversify?

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

8 The Capital Asset Pricing Model

8-1 Market Risk Is Measured by Beta

The Market Portfolio

Why Betas Determine Portfolio Risk

8-2 The Relationship between Risk and Return

What If a Stock Did Not Lie on the Security Market Line?

The Capital Market Line and the Security Market Line

The Logic behind the Capital Asset Pricing Model

Intuition: Why Do High Beta and High Returns Go Together?

Applying the Capital Asset Pricing Model

8-3 Does the CAPM Hold in the Real World?

How Large Is the Return for Risk?

Are Returns Unrelated to All Other Characteristics?

8-4 Some Alternative Theories

Arbitrage Pricing Theory

A Comparison of the Capital Asset Pricing Model and Arbitrage Pricing Theory

The Three-Factor Model

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

9 Risk and the Cost of Capital

9-1 Company and Project Costs of Capital

Company Cost of Capital for CSX

Three Warnings

What about Investments That Are Not Average Risk?

Perfect Pitch and the Cost of Capital

9-2 Estimating Beta and the Company Cost of Capital

Estimating Beta

Portfolio Betas

9-3 Analyzing Project Risk

1. The Determinants of Asset Betas

2. Don’t Be Fooled by Diversifiable Risk

3. Avoid Fudge Factors in Discount Rates

Discount Rates for International Projects

9-4 Certainty Equivalents

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

Mini-Case: The Jones Family Incorporated

Part Three: Best Practices in Capital Budgeting

10 Project Analysis

10-1 Sensitivity and Scenario Analysis

Value of Information

Limits to Sensitivity Analysis

Stress Tests and Scenario Analysis

10-2 Break-Even Analysis and Operating Leverage

Break-Even Analysis

Operating Leverage

10-3 Real Options and the Value of Flexibility

The Option to Expand

The Option to Abandon

Production Options

Timing Options

More on Decision Trees

Pro and Con Decision Trees

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Mini-Case: Waldo County

11 How to Ensure That Projects Truly Have Positive NPVs

11-1 Behavioral Biases in Investment Decisions

11-2 Avoiding Forecast Errors

11-3 How Competitive Advantage Translates into Positive NPVs

11-4 Marvin Enterprises Decides to Exploit a New Technology—An Example

Forecasting Prices of Gargle Blasters

The Value of Marvin’s New Expansion

Alternative Expansion Plans

The Value of Marvin Stock

The Lessons of Marvin Enterprises

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Mini-Case: Ecsy-Cola

Part Four: Financing Decisions and Market Efficiency

12 Efficient Markets and Behavioral Finance

12-1 Differences between Investment and Financing Decisions

NPV Matters for Both Investment and Financing Decisions

The NPV of Financing Decisions Is Zero in Efficient Markets

The NPV of Financing Decisions in Inefficient Markets

12-2 The Efficient Market Hypothesis

Forms of Market Efficiency

Why Do We Expect Markets to Be Efficient?

12-3 Implications of Market Efficiency

What Market Efficiency Does Not Imply

What if Markets Are Not Efficient? Implications for the Financial Manager

12-4 Are Markets Efficient? The Evidence

Weak-Form Efficiency

Semistrong-Form Efficiency

Strong-Form Efficiency

12-5 Behavioral Finance

Sentiment

Limits to Arbitrage

Agency and Incentive Problems

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

13 An Overview of Corporate Financing

13-1 Patterns of Corporate Financing

How Much Do Firms Borrow?

13-2 Equity

Ownership of the Corporation

Preferred Stock

13-3 Debt

The Different Kinds of Debt

A Debt by Any Other Name

13-4 The Role of the Financial System

The Payment Mechanism

Borrowing and Lending

Pooling Risk

Information Provided by Financial Markets

13-5 Financial Markets and Intermediaries

Financial Intermediaries

Investment Funds

Financial Institutions

13-6 Financial Markets and Intermediaries around the World

Conglomerates and Internal Capital Markets

13-7 The Fintech Revolution

Payment Systems

Person-to-Person Lending

Crowdfunding

AI/ML Credit Scoring

Distributed Ledgers and Blockchains

Cryptocurrencies

Initial Coin Offerings

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

14 How Corporations Issue Securities

14-1 Venture Capital

The Venture Capital Market

14-2 The Initial Public Offering

The Public-Private Choice

Arranging an Initial Public Offering

The Sale of Marvin Stock

The Underwriters

Costs of a New Issue

Underpricing of IPOs

Hot New-Issue Periods

The Long-Run Performance of IPO Stocks

Alternative Issue Procedures

Types of Auction: A Digression

14-3 Security Sales by Public Companies

Public Offers

The Costs of a Public Offer

Rights Issues

Market Reaction to Stock Issues

14-4 Private Placements

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

Appendix: Marvin’s New-Issue Prospectus

Part Five: Payout Policy and Capital Structure

15 Payout Policy

15-1 Facts about Payout

How Firms Pay Dividends

How Firms Repurchase Stock

The Information Content of Dividends

The Information Content of Share Repurchases

15-2 Dividends or Repurchases? Does the Choice Affect Shareholder Value?

Dividends or Repurchases? An Example

Stock Repurchases and DCF Valuation Models

Dividends and Share Issues

15-3 Dividend Clienteles

15-4 Taxes and Payout Policy

Empirical Evidence on Payout Policies and Taxes

Alternatives to the U.S. Tax System

15-5 Payout Policy and the Life Cycle of the Firm

The Agency Costs of Idle Cash

Payout and Corporate Governance

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

16 Does Debt Policy Matter?

16-1 Financial Leverage and Shareholder Value

16-2 Modigliani and Miller’s Proposition 1

The Law of the Conservation of Value

An Example of Proposition 1

16-3 Leverage and Expected Returns: MM’s Proposition 2

Proposition 2

Leverage and the Cost of Equity

How Changing Capital Structure Affects the Equity Beta

Watch Out for Hidden Leverage

16-4 No Magic in Financial Leverage

Today’s Unsatisfied Clienteles Are Probably Interested in Financial Innovation

Imperfections and Opportunities

16-5 A Final Word on the Cost of Capital

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Mini-Case: Claxton Drywall Comes to the Rescue

17 How Much Should a Corporation Borrow?

17-1 Debt and Taxes

How Do Interest Tax Shields Contribute to the Value of Stockholders’ Equity?

Recasting Johnson & Johnson’s Capital Structure

MM and Corporate Tax

Corporate and Personal Taxes

17-2 Costs of Financial Distress

Bankruptcy Costs

Evidence on Bankruptcy Costs

Direct versus Indirect Costs of Bankruptcy

Financial Distress without Bankruptcy

Agency Costs of Financial Distress

Risk Shifting: The First Game

Refusing to Contribute Equity Capital: The Second Game

And Three More Games, Briefly

What the Games Cost

Costs of Distress Vary with Type of Asset

17-3 The Trade-Off Theory of Capital Structure

17-4 The Pecking Order of Financing Choices

Debt and Equity Issues with Asymmetric Information

Implications of the Pecking Order

The Bright Side and the Dark Side of Financial Slack

17-5 The Capital Structure Decision

The Evidence

Is There a Theory of Optimal Capital Structure?

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

18 Financing and Valuation

18-1 The After-Tax Weighted-Average Cost of Capital

Review of Assumptions

Mistakes People Make in Using the Weighted-Average Formula

18-2 Valuing Businesses

Valuing Rio Corporation

Estimating Horizon Value

Valuation by Comparables

Liquidation Value

WACC vs. the Flow-to-Equity Method

18-3 Using WACC in Practice

Some Tricks of the Trade

Adjusting WACC when Debt Ratios and Business Risks Differ

Three-Step Procedure for Finding WACCs at Different Debt Ratios

Unlevering and Relevering Betas

Calculating Divisional WACCs

The Assumption of a Constant Debt Ratio in the After-Tax WACC

The Modigliani–Miller Formula

18-4 Adjusted Present Value

APV for the Perpetual Crusher

Other Financing Side Effects

APV for Entire Businesses

APV and Limits on Interest Deductions

APV for International Investments

18-5 Your Questions Answered

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

Appendix: Discounting Safe, Nominal Cash Flows

A Consistency Check

Part Six: Corporate Objectives and Governance

19 Agency Problems and Corporate Governance

19-1 What Agency Problems Should You Watch Out For?

Reduced Effort

Private Benefits

Overinvestment

Risk Taking

Short-Termism

19-2 Monitoring by the Board of Directors

U.S. and U.K. Boards of Directors

European Boards of Directors

19-3 Monitoring by Shareholders

Voting

Engagement

Exit

19-4 Monitoring by Auditors, Lenders, and Potential Acquirers

Auditors

Lenders

Takeovers

19-5 Management Compensation

Compensation Facts and Controversies

The Structure of CEO Pay

19-6 Government Regimes around the World

Ownership and Control in Japan

Ownership and Control in Germany

Ownership and Control in Other Countries

19-7 Do These Differences Matter?

Public Market Myopia

Growth Industries and Declining Industries

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

20 Stakeholder Capitalism and Responsible Business

20-1 Who Are the Stakeholders?

Employees

Customers

Suppliers

Local and Regional Communities

The Environment

The Government

20-2 The Case for Shareholder Capitalism

Government Policy Ensures Companies Will Engage in Socially Responsible Behavior

Maximizing Shareholder Value Allows Investors to Pursue Social Objectives

Maximizing Shareholder Value Requires a Company to Invest in Stakeholders

Enlightened Shareholder Value

Decision Making under Enlightened Shareholder Value

20-3 The Case for Stakeholder Capitalism

Well-Functioning Governments

No Comparative Advantage in Serving Society

Instrumental Decision Making Is Effective

The Challenge of Stakeholder Capitalism

Summary

20-4 Responsible Business

Defining Responsible Business

Decision Making in Responsible Businesses

Summary

20-5 Responsible Business in Practice

Shareholder Primacy in the United States and United Kingdom

Benefit Corporations

B Corps

Purpose

Reporting

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

Part Seven: Options

21 Understanding Options

21-1 Calls, Puts, and Shares

Call Options and Payoff Diagrams

Put Options

Selling Calls and Puts

Payoff Diagrams Are Not Profit Diagrams

21-2 Financial Alchemy with Options

Spotting the Option

21-3 What Determines the Value of a Call Option?

Risk and Option Values

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

22 Valuing Options

22-1 A Simple Option-Valuation Model

Why Discounted Cash Flow Won’t Work for Options

Constructing Option Equivalents from Common Stocks and Borrowing

Risk-Neutral Valuation

Valuing the Amazon Put Option

Valuing the Put Option by the Risk-Neutral Method

The Relationship between Call and Put Prices

22-2 The Binomial Method for Valuing Options

Example: The Two-Step Binomial Method

The General Binomial Method

The Binomial Method and Decision Trees

22-3 The Black–Scholes Formula

Using the Black–Scholes Formula

How Black-Scholes Values Vary with the Stock Price

The Risk of an Option

The Black–Scholes Formula and the Binomial Method

Some Practical Examples

22-4 Early Exercise and Dividend Payments

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

Mini-Case: Bruce Honiball’s Invention

23 Real Options

23-1 The Option to Expand

Questions and Answers about Blitzen’s Mark II

Other Expansion Options

23-2 Options in R&D

23-3 The Timing Option

Valuing the Malted Herring Option

Optimal Timing for Real Estate Development

23-4 The Abandonment Option

Bad News for the Perpetual Crusher

Abandonment Value and Project Life

Temporary Abandonment

23-5 Flexible Production and Procurement

Aircraft Purchase Options

23-6 Valuing Real Options

A Conceptual Problem?

What about Taxes?

Practical Challenges

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Part Eight: Debt Financing

24 Credit Risk and the Value of Corporate Debt

24-1 Yields on Corporate Debt

Distinguishing Promised and Expected Yields

What Determines the Yield Spread?

24-2 Valuing the Option to Default

Finding Bond Values

The Value of Corporate Equity

24-3 Predicting the Probability of Default

Statistical Models of Default

Structural Models of Default

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

25 The Many Different Kinds of Debt

25-1 Long-Term Corporate Bonds

Bond Terms

Security and Seniority

Asset-Backed Securities

Call Provisions

Sinking Funds

Bond Covenants

Privately Placed Bonds

Foreign Bonds and Eurobonds

25-2 Convertible Securities and Some Unusual Bonds

The Value of a Convertible at Maturity

Forcing Conversion

Why Do Companies Issue Convertibles?

Valuing Convertible Bonds

A Variation on Convertible Bonds: The Bond–Warrant Package

Innovation in the Bond Market

25-3 Bank Loans

Commitment

Maturity

Rate of Interest

Syndicated Loans

Security

Loan Covenants

25-4 Commercial Paper and Medium-Term Notes

Commercial Paper

Medium-Term Notes

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Mini-Case: The Shocking Demise of Mr. Thorndike

Appendix: Project Finance

Appendix Further Reading

26 Leasing

26-1 What Is a Lease?

26-2 Why Lease?

Sensible Reasons for Leasing

A Dubious Reason for Leasing

26-3 Rentals on an Operating Lease

Example of an Operating Lease

Lease or Buy?

26-4 Valuing Financial Leases

Example of a Financial Lease

Valuing the Lease Contract

Comparing the Lease with an Equivalent Loan

Financial Leases When There Are Limits on the Interest Tax Shield

Leasing and the Internal Revenue Service

26-5 When Do Financial Leases Pay?

Leasing around the World

26-6 Setting Up a Leveraged Lease

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Part Nine: Risk Management

27 Managing Risk

27-1 Why Manage Risk?

Reducing the Risk of Cash Shortfalls or Financial Distress

Agency Costs May Be Mitigated by Risk Management

The Evidence on Risk Management

27-2 Insurance

27-3 Reducing Risk with Financial Options

27-4 Forward and Futures Contracts

A Simple Forward Contract

Futures Exchanges

The Mechanics of Futures Trading

Trading and Pricing Financial Futures Contracts

Spot and Futures Prices—Commodities

More about Forwards and Futures

27-5 Interest Rate Risk

Forward Rates of Interest and the Term Structure

Borrowing and Lending at Forward Interest Rates

Forward Rate Agreements

Interest Rate Futures

27-6 Swaps

Interest Rate Swaps

Currency Swaps

Some Other Swaps

27-7 How to Set Up a Hedge

Hedging Interest Rate Risk

Hedge Ratios and Basis Risk

27-8 Is “Derivative” a Four-Letter Word?

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

Mini-Case: Rensselaer Advisers

28 International Financial Management

28-1 The Foreign Exchange Market

28-2 Some Basic Relationships

Interest Rates and Exchange Rates

The Forward Premium and Changes in Spot Rates

Changes in the Exchange Rate and Inflation Rates

Interest Rates and Inflation Rates

Is Life Really That Simple?

28-3 Hedging Currency Risk

Transaction Exposure and Economic Exposure

28-4 International Investment Decisions

The Cost of Capital for International Investments

28-5 Political Risk

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test

Finance on the Web

Mini-Case: Exacta, s.a.

Part Ten: Financial Planning and Working Capital Management

29 Financial Analysis

29-1 Understanding Financial Statements

The Balance Sheet

The Income Statement

29-2 Measuring Company Performance

Economic Value Added

Accounting Rates of Return

Problems with EVA and Accounting Rates of Return

29-3 Measuring Efficiency

The DuPont Formula

Other Efficiency Measures

29-4 Measuring Leverage

Leverage and the Return on Equity

29-5 Measuring Liquidity

29-6 Interpreting Financial Ratios

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

30 Financial Planning

30-1 What Are the Links between Short-Term and Long-Term Financing Decisions?

30-2 Tracing and Forecasting Changes in Cash

Tracing Changes in Cash

Forecasting Dynamic’s Cash Needs

30-3 Developing a Short-Term Financial Plan

Dynamic Mattress’s Financing Plan

Evaluating the Plan

Short-Term Financial Planning Models

30-4 Using Long-Term Financial Planning Models

Why Build Financial Plans?

A Long-Term Financial Planning Model for Dynamic Mattress

Pitfalls in Model Design

Choosing a Plan

30-5 Long-Term Planning Models and Company Valuation

30-6 The Relationship between Growth and External Financing

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

31 Working Capital Management

31-1 The Working Capital Requirement

The Cash Cycle

31-2 Managing Inventories

31-3 Accounts Receivable Management

Terms of Sale

Credit Analysis

The Credit Decision

Collection Policy

31-4 Cash Management

How Purchases Are Paid For

Changes in Check Usage

Speeding Up Check Collections

Electronic Payment Systems

International Cash Management

Paying for Bank Services

31-5 Investing Surplus Cash

Investment Choices

Calculating the Yield on Money Market Investments

Returns on Money Market Investments

The International Money Market

Money Market Instruments

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

Part Eleven: Mergers, Corporate Control, and Governance

32 Mergers

32-1 Types of Merger

32-2 Some Sensible Motives for Mergers

Economies of Scale and Scope

Economies of Vertical Integration

Complementary Resources

Changes in Corporate Control

Industry Consolidation

Logic Does Not Guarantee Success

32-3 Some Dubious Motives for Mergers

Diversification

Increasing Earnings per Share: The Bootstrap Game

Lower Borrowing Costs

Management Motives

32-4 Estimating Merger Gains and Costs

Estimating NPV When the Merger Is Financed by Cash

Estimating NPV When the Merger Is Financed by Stock

Asymmetric Information

More on Estimating Costs—What If the Target’s Stock Price Anticipates the Merger?

Right and Wrong Ways to Estimate the Benefits of Mergers

32-5 The Mechanics of a Merger

Mergers, Antitrust Law, and Popular Opposition

The Form of Acquisition

Merger Accounting

Some Tax Considerations

32-6 Takeovers and the Market for Corporate Control

32-7 Merger Waves and Merger Profitability

Merger Waves

Who Gains and Loses from Mergers?

Buyers vs. Sellers

Mergers and Society

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Finance on the Web

Appendix: Conglomerate Mergers and Value Additivity

33 Corporate Restructuring

33-1 Leveraged Buyouts

The RJR Nabisco LBO

Barbarians at the Gate?

Leveraged Restructurings

33-2 The Private-Equity Market

Private-Equity Partnerships

Are Private-Equity Funds Today’s Conglomerates?

33-3 Fusion and Fission in Corporate Finance

Spin-Offs

Carve-Outs

Asset Sales

Privatization and Nationalization

33-4 Bankruptcy

Is Chapter 11 Efficient?

Workouts

Alternative Bankruptcy Procedures

Key Takeaways

Further Reading

Problem Sets

Solutions to Self-Test Questions

Part Twelve: Conclusion

34 Conclusion: What We Do and Do Not Know about Finance

34-1 What We Do Know: The Seven Most Important Ideas in Finance

1. Net Present Value

2. The Capital Asset Pricing Model

3. Efficient Capital Markets

4. Value Additivity and the Law of Conservation of Value

5. Capital Structure Theory

6. Option Theory

7. Agency Theory

34-2 What We Do Not Know: 10 Unsolved Problems in Finance

1. What Determines Project Risk and Present Value?

2. Risk and Return—What Have We Missed?

3. How Important Are the Exceptions to the Efficient-Market Theory?

4. Is Management an Off-Balance-Sheet Liability?

5. How Can We Explain the Success of New Securities and New Markets?

6. How Can We Resolve the Payout Controversy?

7. What Risks Should a Firm Take?

8. What Is the Value of Liquidity?

9. How Can We Explain Merger Waves?

10. Why Are Financial Systems So Prone to Crisis?

34-3 A Final Word

Glossary

Index

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